Hedging Currency Risk Strategies at ABC Corp

Hard Multinational Operations Hedging Currency Risk

ABC Corp is a multinational company based in the United States with significant operations in Europe. Due to fluctuations in the Euro, ABC Corp is concerned about potential losses in the value of its European revenues when converted back to USD. To mitigate this currency risk, ABC Corp's treasury department is considering several hedging strategies.

Among these strategies, one involves purchasing Euro-denominated call options while simultaneously selling Euro-denominated put options on the foreign exchange market. This strategy aims to protect against adverse movements in the EUR/USD exchange rate while retaining the potential to benefit from favorable movements.

Given this context, which of the following statements about the currency risk hedging strategies under consideration is correct?

This strategy will completely eliminate all currency risk associated with the Euro revenues.

The purchase of call options and the sale of put options can create a potential profit if the EUR/USD exchange rate increases.

Selling Euro-denominated put options will incur a liability for the company, which must be funded regardless of currency movements.

Hint

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